This article originally appeared on Business Insider.
Bret Weinstein, a longtime real-estate broker in Denver, wants to love his industry. At its best, the business helps people find the homes of their dreams or secure financial freedom. But lately, he’s been having trouble squaring that passion with a growing problem: a glut of underqualified real-estate agents.
“It really does need an overhaul,” Weinstein told me. “The general public deserves so much better than what the majority of real-estate agents provide.”
The issue, Weinstein said, is that it’s way too easy to become an agent. In most states, getting a license to help people buy or sell a home requires only a few hundred dollars, several weeks of coursework, and a passing grade on a multiple-choice test. The low barrier to entry and fat commission checks lure many to the industry, especially when home prices rise. In the decade-plus since the housing market started to rebound from its financial-crisis lows, the ranks of agents have swelled with part-timers and career switchers looking to capitalize on the boom. At the end of June, there were roughly 1.6 million registered Realtors in the US — or about 2 ½ Realtors for every available home on the market.
This surplus of agents is bad for both the industry and regular people in the housing market, a report from the Consumer Federation of America said last month. The low barrier to entry puts buyers and sellers at risk of ending up with dubious advice on one of the biggest transactions of their lives, while the capable agents are forced to spend inordinate amounts of time and money trying to stand out from the pack, the report said. They also waste hours dealing with incompetent colleagues as they try to get a sale across the finish line. When too many agents are fighting over too few deals, they’re incentivized to keep commission rates high so they can continue to eke out a living — to the detriment of consumers.
Not everyone in the business agrees with this assessment. The National Association of Realtors, the industry’s largest trade association and the entity responsible for setting the professional standards for many agents, has resisted calls to strengthen the requirements for licensure. It says that easy entry is a feature to be celebrated, not a bug — a prime example of free-market competition at work.
It’s just terrible to have such a low bar.
Both the NAR and many brokerages have incentives to keep the number of agents high, since they rely on the dues from agents to keep their businesses going. The NAR has seen its head count grow by nearly 200,000 since the start of the pandemic. But the past few years have also exposed the drawbacks of the setup: Customers grumble over high commissions for subpar service, while an increase in the number of fly-by-night agents has made it harder for those who are dedicated to the profession.
Eradicating these issues isn’t feasible, but there are incremental steps that could improve things. States could raise the educational requirements for licensing, tighten the standards for passing the test, and require hands-on training, rather than leaving that aspect up to individual brokerages. Fewer agents may join the industry as a result, but ensuring that every person who buys or sells a home gets qualified, serious help to navigate the complex process could be worth it.
A threat to the industry
The vast majority of real-estate agents are independent contractors who rely on commissions. The flexibility of the job, promise of huge payouts, and relatively few requirements for getting started proved to be big draws earlier in the pandemic.
It’s never been all that difficult to become a real-estate agent. In most states, the required education can be completed in a matter of weeks, and self-paced online courses can cost less than $100. Real-estate appraisers, Weinstein pointed out, are required to complete “substantially more training than a real-estate agent” to value a home, even though they both play key roles in the sales process. In Texas, for instance, appraisers need 150 hours of education and then 1,000 hours of supervised experience before taking a test and earning their license. To become a real-estate agent, you need 180 classroom hours but no other experience. Other states have similar disparities — Massachusetts and Michigan require just 40 hours of education, while barbers in those states must complete 1,000 hours or more. In Pennsylvania, nail technicians must finish 200 hours of education, compared with the 75 hours required of agents.
“We’re the ones who are negotiating the buy, sell, all of these pieces,” Weinstein said. “It’s just terrible to have such a low bar.”
After completing this training, many, but not all, agents choose to join the National Association of Realtors, which allows them to use the designation of “Realtor” and requires them to abide by a code of ethics. To work as an agent, they’re also required to affiliate with a brokerage, which is largely responsible for training and mentoring the agent from that point forward. Some do this job well, but others focus on “quantity over quality,” Weinstein, who founded the brokerage Guide Real Estate in 2018, told me. A new agent might bring in a few friends and family as clients, providing the brokerage with cuts of their commission checks. But if the agent then flounders, there’s little harm for brokerages, since they don’t pay the agent a salary and can look ahead to the next crop of entrants.
“There should be an internship period,” Weinstein, told me. “But because it’s commissions only, we just drop people in.”
It may be easy to get started, but making it in the business is another story. Last year, Realtors with less than two years of experience earned a median gross income of just $9,600, according to the NAR. Those with 16 years or more of experience collected a much-larger median gross income of $80,700, but fewer agents make it that far — roughly one-third of Realtors last year said they’d been active for five years or less.
“The real estate industry shows the entrepreneurial spirit of Americans who start their own business in a fiercely competitive environment,” Lawrence Yun, the chief economist and a senior vice president of research for the NAR, said in an emailed statement. “Similar to restaurants and retail, not everyone succeeds.”
The costs to stay in the business can quickly add up. Membership to the local and national Realtor associations, as well as access to the database where homes are listed for sale, can cost more than $1,000 a year. Most agents are also affiliated with a brokerage that gets a slice of their commissions and may charge additional fees. Then there are the costs for client leads, advertising, gas, and so on. And because there aren’t nearly enough deals each year to sustain all these agents, many quickly find that they can’t support themselves on real estate alone.
The constant churn and minimal standards are problems for everyone involved, Stephen Brobeck, a senior fellow at the Consumer Federation of America and the author of the CFA’s recent report, told me. The excess of agents becomes even more damaging when home sales fall, as they did over the past year when mortgage rates shot up.
“It’s essentially a zero-sum game,” Brobeck told me. “The commission income is basically fixed. And to the extent the number of agents that are active in the marketplace rise and fall, average income for each agent rises or falls.”
The battle between entrepreneurial spirit and consistent quality is a long-running topic of heated discussion within the industry — a 2015 survey by the real-estate news outlet Inman found that real-estate pros considered “low-quality agents” to be the industry’s biggest challenge. That same year, an NAR-commissioned report on the dangers facing the industry identified “masses of marginal agents” as one of the key threats to other agents and the profession at large.
“The real estate industry is saddled with a large number of part-time, untrained, unethical, and/or incompetent agents,” the report said. “This knowledge gap threatens the credibility of the industry.”
The report added that the difference “between great real estate service and poor real estate service has simply become too large, due to the unacceptably low entry requirements to become a real estate agent.”
Consumers get the short end
Normally, you’d expect more competition among agents to be a good thing for consumers, since agents would be incentivized to drop their prices and undercut their opposition to score more clients. But in real estate, that’s not really how it works. Agents tend to collect between 5% and 6% of the sale price of a home, split between the buyer’s and the seller’s agents, regardless of their level of experience, the quality of the service, or the amount of time they spend on the deal. While the NAR says commissions are always negotiable, consumers generally don’t see the benefits of having more options, at least when it comes to their bottom lines.
Buyers and sellers could, of course, forgo an agent and try to complete the transaction themselves. But despite the ease with which home shoppers can now browse homes online, buyers and sellers still see themselves as dependent on real-estate agents. There’s a “huge asymmetry in knowledge between the industry and consumers,” Brobeck told me. The process of buying or selling a home is complicated — between mortgage applications, insurance, inspections, and a heap of paperwork along the way, few are equipped to go it alone.
The risk of ending up with an incompetent agent can’t be overlooked, Brobeck told me, even though it’s “highly likely” that at least one agent in a deal is capable of completing the sale. The CFA report cited several surveys that indicated most buyers and sellers were at least somewhat satisfied with their experience with agents, though Brobeck added the caveat that consumers might not have the tools to accurately gauge the performance of their chosen professionals.
How the system could change
There are trade-offs to consider here. Jessica Reinhardt, a second-generation Realtor and the president of the Denver Metro Association of Realtors, told me she worried that raising the barrier to entry could turn away those who’re already underrepresented in the industry. Last year, the typical Realtor was a 60-year-old white woman who attended college and was a homeowner, according to the NAR.
“I do think it’s a double-edged sword,” Reinhardt told me. “I think you risk losing access for the underserved communities. They want somebody in their communities who they can relate to, to help them buy a house. And if those people don’t have the ability to become a real-estate agent or a Realtor, then they lose their access to representation.”
Reinhardt also bristled at the notion that those with little experience were necessarily unqualified to do the job or didn’t deserve the same commissions as their more-experienced counterparts.
“I think that you could come into this industry, be brand-new in it, and be killing it,” Reinhardt said. “You understand it, you took the time to educate yourself, and you deserve just as much as somebody who’s been doing it for 10 years.”
You get in, you go through the classes, you think you’re ready, and it either chews you up and spits you out, or it turns you into a great Realtor
Competition, Reinhardt said, is necessary for the business. And those who aren’t equipped to make it don’t stick around forever — they simply can’t afford to keep paying the costs to stay in the business.
“You get in, you go through the classes, you think you’re ready, and it either chews you up and spits you out, or it turns you into a great Realtor. I don’t necessarily think it needs to be stopped, and I don’t necessarily think it will change,” Reinhard said. “I just think it’s part of the industry.”
There are ways the system could change, though. The state agencies that control licensing for agents could increase the education standards or require that agents complete a certain amount of supervised experience in the real world before fully earning their license. The NAR, with its powerful lobby, could push for such changes. The organization could also implement more continuing education for members to retain their “Realtor” designation — currently, it defers to state requirements, which vary considerably.
The multibillion-dollar lawsuits against the NAR and major brokerages over agent commissions could also drastically reshape the industry. If the plaintiffs, who represent a wide swath of home sellers, prevailed, commission rates could fall significantly. That, in turn, could prompt an exodus of agents. The existential threat of these lawsuits has prompted a lot of hand-wringing among agents and executives who worry about preserving the commission rates. But Weinstein told me those concerns missed the larger point.
“There wouldn’t be a lawsuit if every one of those people felt like they were being taken care of, valued, working with a true professional,” Weinstein said, “as opposed to feeling like they’re forced to pay them out whatever the result may be.”
This story originally appeared on Entrepreneur
